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Friday, June 26, 2015

Water infrastructure specialist Salcon Bhd (fundamental: 1.65; valuation: 1.2) is confident of securing between 30% and 40% of its RM2 billion tender book by end-2015, despite the gloomy economic outlook.

Executive director Datuk Eddy Leong Kok Wah (pic) said the company’s average success rate on its tender book was at around 20%, but it could hit the targeted figure this year.

“The tenders mainly consist of domestic projects [worth] up to RM2 billion, out of which RM1.25 billion is local and RM750 million is overseas. We have eight [ongoing] local projects and five in Sri Lanka.

“If we can secure one of the local contracts this year, we can easily secure 30% to 40% of our RM2 billion tender book. It still depends on the party … but we know that we are in the running. We are optimistic. We have our track record. And we are trying hard,” said Leong after the company’s annual general meeting yesterday.

He said the company is quite comfortable after receiving payment for eight out of its nine concessions in China. Currently, Salcon is sitting on a RM270 million cash pile as a result of disposing of its China portfolio.

“Currently, the final concession is under arbitration. The issue with our partner in Shantung is that [although] they want to buy [our] shares, they don’t want to pay the same amount that our Beijing client is willing to pay.

“We are confident the matter will be resolved ... by the third quarter of this year,” said Leong, adding that the company is now looking into areas in which to invest its China proceeds as some shareholders are not happy with the 3% bank interest rate the company is gaining as “sleeping money”.

Moving forward, Salcon hopes that its diversification into the property and telecommunication markets will also contribute to future revenue when compared with its more traditional water treatment and waste water business.

“We have secured a 15-year concession with Prasarana to lay fibre optics along monorail and LRT lines to provide broadband to the rail service. It’s known as Vox Bahn Technolog. We laid the cables in January and are now negotiating with all the major telcos.

“The telcos will then lease [the service] to end users or subscribers,” Leong said.

He added that the company has three parcels of land that are being developed but due to “turbulent times”, Salcon is taking more time with it.

“We have diversified a bit into property development. We got our first project in Selayang, Selangor, building 280 units of apartments, [which we] hope to deliver by end of next year. The pick-up rate is 70% and above, so it’s quite positive,” said Leong, adding that the project’s estimated gross development value is RM160 million, which is to be factored in next year.

Salcon’s land bank also includes a 12.5-acre (4.18ha) lot in Johor Baru and 5½ acres in Kampung Attap, Kuala Lumpur.

Monday, June 15, 2015

Salcon is an under-researched and in our view still-undervalued small/mid-cap water and sewerage contractor. It exhibits the qualities of its bigger peers in their early years of M&A and is positioned strongly in two major sectors that drive the domestic construction space. Salcon’s rail-based fibre optic asset through 50.1%-owned VBT is a concession that is still in its infancy but offers prospects of dominating the captive rail transport segment. We initiate coverage with an Add rating and a target price of RM1.30, pegged to a 20% RNAV discount (52% upside). Potential catalysts are job wins and VBT's new contracts.

Thursday, June 4, 2015

K-One Technology Bhd, an ACE Market-listed company that stands out for the large number of institutional funds listed as its shareholders, has shaved off more than half of its market value over the last five trading days. The stock has suffered a 50.4% drop between May 27 and June 3 to close at 31 sen yesterday.

K-One warrants, meanwhile, are down 54.29% over the same period to last trade at 17.5 sen.

Market observers pointed out that it is likely that the stock is being penalised for its disappointing results. ..

K-One is a one-stop technology solutions provider with its core activity in design, development, industrialisation, final assembly and quality testing of electronic end-products.

On May 27, K-One announced that its net profit for its first quarter ended March 31, came in 84% lower to RM520,000 as opposed to RM3.24mil in the previous corresponding quarter.

The company is expected to see more resilient earnings in the financial year 2015 (FY15), according to a research report early in the year, which had placed a fair value of 63 sen for the stock.

This follows the award of new orders worth around RM20mil from a world renowned multinational corporation in the fourth quarter of last year.

The contract was for the manufacturing of high-end communication accessories for sales and distribution globally, which could open doors for it to potentially win bigger size orders from another global brand customer, the research firm noted in the report.

K-One’s mobile phone accessories segment, meanwhile, was also seen to benefit from a strong wave of the smartphone/tablet upcycle. The company was making losses in FY11 and FY12, before turning around in the third quarter of FY13. It undertook a restructuring that included divestment of its loss-making businesses, rebalancing its product mix and better cost-management.

For FY14 ended Dec 31, it had reported a net profit of RM11.85mil from RM1.01mil in FY13.

In its recently released 2014 annual report, K-One executive chairman Edwin Lim Beng Fook said that the company anticipated the good vibes relating to its business performance in 2014 to extend this year. At the same time, he cautioned that “the uncertainties of the global economy may pose business challenges, hence dampening growth”.

K-One’s major shareholders are brothers Edwin and Lim Soon Seng, who own 15.38% and 13.14%, respectively. Norwegian Bjorn Braten holds 10.57%, while where funds are concerned, CIMB-Principal Asset Management has 4.73% and Kenanga Unit Trust Bhd, 2.66%, according to Bloomberg data. Other funds with exposure in K-One are OSK UOB Unit Trust with 1.66% and Prudential Unit Trust with 1.35%.